Sign up to like post

Sign up to like post

Share

The big China news today is the arrest at the Vancouver airport of Meng Wanzhou (孟晚舟), Hauwei CFO and deputy chairperson, as well as the daughter of Huawei founder Ren Zhengfei. Meng was transiting through Canada on her way to South America.

The US requested the arrest and want her extradited to the US apparently as part of an investigation into Huawei’s possible violation of US sanction on Iran.

Today’s newsletter is in a different format as it is just a note about Huawei and possible ramifications. We have a last shipment of stuff from China arriving any minute so I have to deal with movers this AM.

The Ministry of Commerce said Thursday China will immediately start implementing agreements on agricultural products, energy and cars that were reached at the weekend summit between Chinese and U.S. leaders over their ongoing trade dispute.

Calling the talks with the U.S. “smooth,” Ministry Spokesman Gao Feng said at Thursday’s news conference that China is “fully confident” it will reach an agreement with the U.S. in 90 days, though he didn’t offer details. He added that the talks will also address areas such as intellectual property rights, technology cooperation, market access, and the trade imbalance [商务部：未来90天将以取消所有加征关税为最终目标];

Meng was detained the same day as the Trump-Xi talks. Buenos Aires is 5 hours ahead of Vancouver, so it is possible the Chinese side did not know at the time of the meeting. They certainly knew by the time the Ministry of Commerce issued its statement about the Buenos Aires meeting and trade talks, so I see that as another sign that the trade talks will likely continue. (I admit that I first heard of her arrest Tuesday evening, but given how explosive it is I did not want to say anything without a second source. Sorry, I wish I could have given you all a 12 hours+ head start on this.);

Not that Xi and the CCP need another reminder of the existential threat that US technological dominance poses, but this case will be used as another rallying point in the increasing efforts to reduce reliance on the US, and is just yet another move in the spiraling US-China technology competition;

While this case appears to be about Iran sanctions specifically, it certainly fits within the broader campaign by the US to block Huawei from 5G networks outside of China, and especially in the Five Eyes alliance countries (US, Canada, UK, New Zealand, Australia). In the last few weeks we have seen the UK, Canada, New Zealand and Australia all start blocking Huawei from 5G. Whether or not this detention is part of a broader US “whole of government” strategy I do not know, but expect Xi and his colleagues to see it as part of a broader US conspiracy;

I wonder if President Trump knew this arrest was coming. There were rumors months ago of a draft executive order against Huawei over Iran sanctions violations. It is certainly possible that Trump did not know the specifics or the exact timing. While it is a legal matter that should be ring-fenced from the broader US-China relationship we know from the ZTE case that President will use cases like this as bargaining chips, and that the Chinese will certainly not see this as anything but a broader US campaign;

Huawei is less reliant on US technology than ZTE so any US export sanctions against the company are unlikely to be a corporate death sentence as it was for ZTE, such restrictions would hurt Huawei and would hurt its US suppliers;

There is no guarantee that this case will be resolved any time soon. The Canadian courts have to weigh in, and that process towards either release or extradition could run for a while;

Expect China to use whatever methods they can to pressure the Canadians, but threats will not go over well in Ottawa;

Sorry to be a broken record but I will say this again: any foreign and especially US technology firm that has supply chain reliance on China needs to be deep into planning for reducing that reliance, no matter how hard, painful and expensive such a shift would be. Frankly boards of directors of those firms are negligent at this point if they are not pushing the company to do this planning;

I have seen speculation that China may retaliate by arresting a US tech executive. That would certainly be explosive, but I am not sure Beijing would do that without a very clear legal case as it would undermine the massive propaganda campaign the Party has undertaken to portray the PRC as open for foreign business and as the defender of the global trading system. However, if I were a US tech executive I would delay travel to China for a bit or go on a vacation if based there…

Even if there is a trade deal as discussed in Buenos Aires it will no nothing to change the trajectory of the growing US-China technological competition.

Sinocism offers a 70% discount to current students. You have to sign up here. I will only honor the discount for new subscribers who are students using emails with .edu or .ac.uk right now (email me if you are a student with a different education top-level domain), and none that are alumni accounts.

At the request of the US side, the Canadian side arrested a Chinese citizen not violating any American or Canadian law. The Chinese side firmly opposes and strongly protests over such kind of actions which seriously harmed the human rights of the victim. The Chinese side has lodged stern representations with the US and Canadian side, and urged them to immediately correct the wrongdoing and restore the personal freedom of Ms. Meng Wanzhou. We will closely follow the development of the issue and take all measures to resolutely protect the legitimate rights and interests of Chinese citizens.

A “declaration of war” against China was how Hu Xijin, the editor in chief of Global Times, a state-run newspaper known for its nationalist tone, described Ms. Meng’s detention on Weibo, a Twitter-like service.

Gavin Ni, the chairman of Zero2IPO Group, an influential research and consulting firm in China’s investment industry, wrote on his WeChat social media account: “The China-U.S. competition is not merely a trade rivalry, but a rivalry on all fronts. Carry on, our motherland!”..

“The Chinese government and Chinese companies must face these new circumstances, take up new countermeasures and get through this stage of crisis,” Fang Xingdong, the founder of ChinaLabs, a technology think tank in Beijing, said on Thursday. “This is a necessary rite of passage for China’s global technological rise.”

Huawei chief financial officer Sabrina Meng Wanzhou, who was arrested in Canada and is facing a US extradition request, had told employees in an internal talk on compliance that there are scenarios where the company can weigh the costs and accept the risks of not meeting the requirements of the law.

Meng took part in an internal question-and-answer session on October 29 with her father, Huawei founder Ren Zhengfei, where father and daughter shared their views on compliance

Let us leave aside the debate as to whether Huawei is a private company. Dispelling the fog in the pursuit of transparency has progressed little over the years. What is clear — the Party has told us so — is that through the Party committee embedded inside private companies the CCP has an enormous say in their affairs. Furthermore, recent national security legislation lays down that companies must do the Party’s bidding when called upon to do so for national security reasons...

There is a further, more powerful argument. The intelligence sharing agreement between the “Five Eyes” — US, UK, Canada, Australia and New Zealand — is of immense importance. This is not just about sharing intelligence, for example on terrorism or security threats, but about working together on designing and operating those systems and technologies for intelligence collection.

Three of the Five Eyes have ruled out Huawei from their own systems. They will not trust the UK fully if Huawei is inside our systems, even with the “cell”. ..

Should the government be willing to bet our security on the benevolence and restraint of the CCP? In the light of its current repression of its own people, its aggressive foreign policy and interference abroad, that surely crosses the border from naïveté into irresponsibility.

Sign up to like post

Sign up to like post

Sign up to like post

Share

Hi everyone, I have moved up the Monday newsletter to Sunday evening to get out some quick thoughts on the Trump-Xi meeting. I am going to be on CNBC in the US tomorrow at 6AM to discuss the meeting and so there will likely not be another newsletter until Tuesday. Wish me luck, I have not done TV in a very long time…

The US and China agreed to step back from the brink of the trade conflict, at least for 90 days. President Trump told Xi Jinping that he will not add any new tariffs or increase the rate on existing ones while the US and China spend the next 90 days trying to work out a more lasting deal.

Conveniently that timeline gets both sides through key holidays—Christmas in America and the Lunar New Year in China. It also means the deadline hits right as the 2020 US Presidential election starts gearing up.

Markets so far seem pleased at the outcome, though there is little to indicate any of the structural, contentious issues in trade (such as IPR protection, forced technology transfers, State-owned enterprises) or just about every other dimension have a better chance of being resolved now than they did before the meeting. I did not see anything announced from the US side about human rights, Xinjiang, or the three American citizen family members of Liu Changming who are not allowed to leave the PRC.

At first glance the outcome looks like a win for Xi Jinping and China. The Chinese are always playing for time and any pause that involves more talking is a victory for Beijing, as it only adds to the chances they have for a shift to a more favorable US domestic political environment and, as we have learned with the waning “maximum pressure” campaign on North Korea, once you step back from the brink it is difficult to marshal the support to return to it if the talks do not bear fruit.

China hawks may have more reason to be concerned given that stock futures are way up on the G20 news. In the wake of Buenos Aires, I spoke to two sources familiar with Trump's thinking on China, and both said they worry he's too concerned about keeping the stock market buoyant to risk tanking it by hitting China with new tariffs. A stock market boost on Monday could reinforce Trump’s instincts. (Which would suit free traders Larry Kudlow and Steven Mnuchin just fine.)

These hawks worry the Chinese can drag the "dialogue" with the Trump administration beyond the 90 days, delaying action from a president hobbled by looming Democratic subpoenas, a special counsel investigation and a wobbly stock market.

"Everything has got to be seen through the prism of the investigation and needing short-term micro tactical wins," said one of these concerned hawks. "And that's why the stock market going up is a win."

"The whole effort with China has been brought to a grinding halt," the source argued, comparing the delay to a short-term continuing resolution to kick the government funding fight down the road.

Which begs the question: has President Trump, who has pushed the Chinese on trade harder than any recent US President, failed to maximize the leverage his administration policies created?

China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries. China has agreed to start purchasing agricultural product from our farmers immediately.

Any resumption of bulk buying of US agricultural goods would be welcomed by US farmers who looking at rotting crops and massive losses.

Peter Martin@PeterMartin_PCMConfused about what exactly Xi and Trump promised each other yesterday?
Here's a side-by-side comparison of the readouts from both sides. The U.S. on the left, China on the right
https://t.co/5N7aISEdew
@LucilleLiu @JDMayger @Jeffrey_Black

December 2 2018

945 Retweets1060 Likes

The Sunday CCTV Evening News has a report (习近平同美国总统举行会晤) on the meeting. It is the second report, after one on Xi’s attendance at the G-20. The CCTV report does not include specific mentions of purchases of US goods or the 90 day timeline, but it does note Trump’s comment that America welcomes PRC students and Xi’s commitment to do more to crackdown on Fentanyl production and export. Does that mean that Alibaba will come under pressure to remove all listings for fentanyl and its related compounds?

People’s Daily puts their happy handshake top right of page 1 of Monday’s paper:

If you have a company with significant supply chain exposure to China you should continue to be making plans to reduce reliance on China. Maybe we really have walked back from the brink, but I doubt it and am still very skeptical that the US and China can solve the underlying structural issues in the next several years, let alone 90 days.

What’s next:

Liu He may bring a negotiating team to DC in the next ten days or so. If he does not show up soon that is probably a bad sign:

In December China will hold the annual Central Economic Work Conference, possibly a Fourth Plenum, and likely a big speech from Xi for the 40th anniversary of the 3rd Plenum held from December 18 -22 that year, the meeting that marked the start of the Reform and Opening Era.

There is no Essential Eight today, but here are some recommended readings:

1. Trump’s “leading authority on China” Michael Pillsbury is the subject of Politico and New York Times profiles this weekend. It seems quite the coincidence that they would both run similar stories right before the big Trump-Xi meeting.

A day before President Donald Trump departed for the G-20 summit in Buenos Aires, several top officials gathered in the Oval Office to strategize about Trump’s highly anticipated meeting there with China’s president…

Before the discussion ended, Pence stepped out to fetch an outsider for a final briefing about Trump’s Saturday dinner with Chinese president Xi Xinping, which could determine whether the U.S. and China plunge deeper into a potentially disastrous trade war.

That outsider was Michael Pillsbury, a starchy academic at Washington’s conservative Hudson Institute enjoying a remarkable, and unlikely, influence. He has caught the ear of Trump, who during a November press conference proclaimed him “probably the leading authority on China.”..

He reportedly lost (then regained) his security clearance in the 1980s amid suspicion that he leaked classified information. He said he is currently in the process of trying to renew his clearance…

One former senior White House official supportive of Pillsbury’s views said that several key administration figures like Mattis were initially reluctant to view China as a primary strategic threat.

Now, thanks to Pillsbury, the former official said: “Everybody’s woke.”

In the interest of full disclosure, Hamish is an old friend of Sinocism, having done a profile of me (Bill Bishop: The Invisible China Hand) for Pando Daily back in 2012. He is also a cofounder and senior executive of Substack, the platform that powers this newsletter and in which I am an investor.

But those are not the reasons I am excerpting some of the parts about China and the development of electronic vehicles in the country. Hamish’s work gives some interesting and useful context to the booming EV industry in China.

Before we get to the excerpt I have a couple of housekeeping announcements:

Sinocism now offers a 70% discount to current students. You have to sign up here. I will only honor the discount for new subscribers who are students using emails with .edu or .ac.uk right now (email me if you are a student with a different education top-level domain), and none that are alumni accounts;

You can now give the gift of Sinocism. Seriously, what could be better for someone interested in China than a year’s worth of Sinocism, truly a gift that keeps giving?

On to the excerpt from Insane Mode: How Elon Musk’s Tesla Sparked an Electric Revolution to End the Age of Oil:

“Build Your Dreams”

You never have to look far to find scenes of change in China, but the sense of dynamism is perhaps nowhere more profound than in the border city of Shenzhen. In the 1970s, Shenzhen was an unremarkable fishing village at the end of the Kowloon-Canton rail route. Since President Deng Xiaoping established it as a Special Economic Zone in 1980 as part of the opening up of China’s economy, it has been on a mercantile tear, its population exploding to twelve million people. Today, Shenzhen is a booming metropolis, overflowing with energy and optimism. It is a beacon for young people who want to get ahead in business or score a job at one of the city’s tech companies, like electronics manufacturer Huawei, Internet giant Tencent, or the iPhone-producing Foxconn. Migrants from other parts of China make up more than 80 percent of the city’s population.

Shenzhen stretches its arms thirty-five miles wide as it hugs Hong Kong’s New Territories. To drive from one side to the other is to pass bright new skyscrapers, shopping malls, convention centers, entertainment venues, and sports arenas of geometric radicalism, each competing to attain new levels of gobsmackery, preening under the weight of reflective domes, fine latticework, structural cowlicks, honeycombs, razor edges, suspended ledges... It’s not a mere excitement of the architectural senses—it’s a raging orgy.

The city interior is mostly gray, a dirty clamor of buildings, roads, and sky, occasionally offset by verdant greens that grow rampantly in the subtropical climate and feast on carbon dioxide. The air is gritty with particulates, and one’s breath seems to come out in clods. The streets confront pedestrians with a conflict of the senses: beef broths bubbling in sidewalk stalls; a faint chemical whiff, like new-tire smell, emanating from nearby factories; an undertone of sewage. Buckets in underpasses catch leaks just downstairs from bus shelters that advertise the Apple Watch. Car horns are leaned on without relent. Chinese pop music blares from open-doored shops. Busy people in their twenties, with tight jeans and pretty summer dresses, rush from somewhere to somewhere. It is impossible to imagine the sleepy fishing village that this place once was, and it is unlikely anyone bothers to try. Everyone in Shenzhen looks forward.

“Build Your Dreams.” There could be no more apt promise for this city in this epoch, but the slogan happens to be under the ownership of BYD Auto, one of the world’s largest sellers of electric cars (the largest, if you count hybrids). BYD’s auto division has been based in Shenzhen since 2003, when its parent, BYD Company, acquired a failing local manufacturer called Tsinchuan Automobile Company. Its first car, a gasoline sedan called the F3 that retailed for about $10,000, rolled off the production line in 2005.

To get to BYD Auto’s headquarters, you have to drive twenty-five miles east from the center of Shenzhen to the industrial suburb of Pingshan, past a dribble of drab manufacturing buildings, bleak apartment complexes with laundry hanging outside the windows, and men selling car seat covers from the side of the highway. En route to my destination, my taxi passed a crane that had dropped a shipping container. Cardboard boxes carrying bottles of motor oil had spilled onto the road.

BYD Auto’s campus sits behind an arch of steel pipes and aluminum roofing at its entrance, a faded attempt at industrial grandeur. The sides of the soccer-field-size hexagon that serves as BYD Auto’s global headquarters are painted the same sky blue as the shirts that every worker has to wear. My guide for the day, a young woman on the marketing team, was proud to be at BYD, a rare Chinese company that can claim a global presence. Outside of China, it has offices and factories in the United States, Canada, Japan, Korea, India, Mexico, and Europe. Overall, the company brought in about $11 billion in revenue in 2015.

Wang Chuanfu, an engineer and chemist, cofounded BYD in 1995 at the age of twenty-nine with $300,000 in start-up capital he had raised from relatives. The company earned its early fortune by making rechargeable batteries for mobile phones and counted Motorola, Nokia, Sony Ericsson, and Samsung among its clients. After listing on the Hong Kong Stock Exchange and then acquiring Tsinchuan, Wang plotted a course for BYD to become a leading producer of electric cars and solar power systems—a move that would eventually lead to Warren Buffett, through a Berkshire Hathaway subsidiary, buying 10 percent of the company for $230 million. Buffett’s investment partner Charlie Munger had told the “Oracle of Omaha” that CEO Wang was like a mix between Thomas Edison and Jack Welch—“something like Edison in solving technical problems, and something like Welch in getting done what he needs to do.”

As we walked around the hexagon—a Tetris-era predecessor to Apple’s “spaceship” headquarters—my guide told me that she loved living in Shenzhen. The weather’s good, and, for a major city, it is accommodating of newcomers, she said. In Beijing and Shanghai, the local governments’ anti-speculation policies made it difficult for nonresidents to buy property, but in Shenzhen, it was easy to fulfill their dream of home ownership. The city, after all, is nothing but outsiders—just as eight in ten people are migrants, so are eight in ten home buyers.

BYD’s dream is for a zero-emissions world. We completed our circuit of the building—strolling past packed parking lots of BYD cars and dozens of the Denza model, an electric crossover utility vehicle that was a product of the company’s joint venture with Daimler—and stepped inside the hexagon. The interior had the feel of a semi-abandoned hospital, with faux marble floors and an almost total lack of natural light.

After a brief tour of BYD’s greatest hits in a museum-like showroom for electronics and battery products, my guide led me to a diorama that exhibited the company’s vision. Implanted in a desert in the miniature landscape were solar panels and windmills that fed imaginary power to a battery base station on the edge of a green, populated area. A few electric trucks roamed the miniature streets, while a car sat parked in the garage on the ground floor of a luxury house. Electric vehicle charging stations were dotted around like gas stations.